By this point, if you’ve read through much of our site, you’re pretty familiar with the standard Roth IRA, but a lot of people don’t know you also have the option of making a Roth 401(k).
By using the Roth feature in your 401(k) plan, you can put some, or all of your deposits up to $16,500 a year, or $22,000 if you’re over 50. The rules are a little different than what you’re used to with your standard 401(k). You actually receive the tax advantage right now rather than in the end with the traditional Roth. This means you will have to pay tax on it when you withdraw the funds later.
With the Roth IRA, you usually have limits on how much you make a year, but with the Roth 401(k) you don’t have to worry about income limits. Anybody can open a Roth 401(k) as long as your employer offers it, and if they don’t you should make a request to have it added. It doesn’t cost the employer much so it shouldn’t be an issue.
The big advantage of going this route is to hedge against tax increases. You never know how the tax rates will change or what bracket you’ll be in so the Roth 401(k) is a great safety net for a situation where the taxes have raised dramatically. Most people see the tax rates going up soon so now is the time to lock in your money. The goal is to have money in both a traditional 401(k) and the Roth so that you can withdraw money at different times depending on the current tax rates after retirement.
This is the same old theory of not having all of your eggs in one basket, and protecting your retirement funds as much as possible. Here’s a video that explains more:
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